EUR/USD Pressured as Fed/ECB Divergence Grows; Euro Steady Elsewhere

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In a week without major domestic-driven influences, it’s not surprise that the Euro had a mixed performance. Indeed, with the two major ‘divergence’ currencies moving in opposite directions, FX markets had a lot to grapple with in the first full week of November. On one hand, the Euro was a beneficiary: after the Bank of England’s dovish shocker, EUR/GBP rallied by +0.02% to close the week at £0.7137, but only after trading as low as £0.7042; after the blowout October US Nonfarm Payrolls report, EUR/USD slumped by –2.47% to close the week at $1.0733.

Last week in this column, we wrote how there would need to be greater signs of policy divergence in order for EUR/USD to continue its decline; at that time, US economic data was middling, while Euro-Zone data was improving. Indeed, this condition was fulfilled with the exceptionally strong US NFPs. It must be understood that the entire upswing in the USD-complex is predicated on rapidly shifting rate expectations, which are now pricing in over a 70% chance of a 25-bps rate hike in December by the Federal Reserve. Yet EUR/USD’s decline isn’t foreshadowing the Euro’s performance more broadly.

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